Academic journal article Social Education

What Are Mutual Funds?

Academic journal article Social Education

What Are Mutual Funds?

Article excerpt

This lesson plan originally appeared in Learning, Earning and Investing, a 2004 publication of the National Council on Economic Education.

IN THIS LESSON, students form class investment clubs that work much in the way mutual funds do. They invest [an imaginary] $3,000 (300 shares at $10 a share) in up to six stocks. "One year" later they revalue their shares and determine whether a share in their class investment clubs has increased or decreased in value. Finally, they read about mutual funds and learn that the concept behind mutual funds is similar to the concept behind their class investment clubs.

A mutual fund is a pool of money invested by a manager with the goal of increasing the value of each share of the fund for its investors. A mutual fund provides diversification, spreads risk and provides the convenience of buying and selling shares in the fund on any business day. These are the reasons why more Americans invest through mutual funds than directly in the stock, bond or money markets.

Concepts

* Diversification

* Liquidity

* Load

* Mutual fund

* Net asset value

* Risk and reward

Objectives

Students will:

1. Describe how mutual funds work;

2. Evaluate the advantages and disadvantages of investing in mutual funds;

3. Use the terminology of mutual funds;

4. Calculate the value of an investment on a per-share basis.

Time Required

75 minutes

Materials

* A transparency of Visuals 1 and 2

* A copy of Activities 1-4 for each student. Copy Activities 1 and 2 on separate pages.

Procedure

1. Explain to the students that they are going to learn about mutual funds. More Americans invest in stocks and bonds through mutual funds than in any other way.

2. Tell the students that a mutual fund is like an investment club with thousands of members. An investment club is any group of people who pool their money, invest and share the profits or losses. The class is now going to form investment clubs with just a few members.

3. Divide the class into groups of no more than five members each. Tell the students that each group is an investment club, and members will have to make some decisions about where to invest their money.

4. Distribute a copy of Activity 1 to each student.

5. Go over Activity 1 and make sure the students understand these major points:

* Each club has $3,000 to invest.

* The club sold 300 shares at $10 each to members to raise the money that they will invest.

* They may buy any of six stocks. They must buy at least three stocks, but they may divide their money among all six stocks if they wish to do so.

* They must invest the entire $3,000.

* They must fill out the chart at the end of Activity 1. The investment value must be $3,000 (total of the last column). The price per share will be $10 ($3,000 / 300).

6. Give the groups about 15 minutes to make their investment decisions and fill out the charts. Be sure to check their math because the rest of the activity will not work unless their math is correct.

7. Distribute a copy of Activity 2 to each student. Explain that it is now "one year" later. The value of the shares of stock they could have bought has changed. Column 2 of Activity 2 shows the new per-share price of the stocks. How well did their selected stocks perform?

8. Display Visual 1 as an example of how the chart should be completed. Make sure the students understand that this is an example; their charts will differ depending on which stocks they purchased and how many shares they purchased.

9. Ask the groups to complete their charts and check the math. The amount invested will still be $3,000, and the number of shares of stock owned will be the same as in Activity 1. …

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